Factors To Consider When You Are Into Real Estate Investing
What’s the main thing to look for in real estate? While the location has to be a key consideration, there are many factors that can determine if an investment is the right one. Read on to learn about the factors to consider when you are doing real estate investing!
Property Location
There is a reason why people keep saying “location, location, location”. This remains the most important factor in real estate investing. Green space, scenic views, proximity to amenities, and the neighborhood’s status factor greatly in residential property valuations. Closeness to warehouses, transport hubs, markets, freeways, and tax-exempt areas is important for commercial property valuations.
When thinking about the property location, you have to take a mid to long-term view. Consider how the area is expected to evolve over the investment time. For example, the open land near the residential building could turn into a noisy manufacturing facility someday, thus diminishing its value. You have to review the ownership and planned usage of the areas where near where you want to invest.
One way to find such information about the prospects of the vicinity of the property you want to invest in is to contact the town hall or agencies in charge of urban planning. You will get access to the long-term area planning and determine how favorable the property is for your own plan.
Valuation of Property
Property valuation is essential for financing during the purchase, listing price, insurance, investment analysis, and taxation, these depend on the real estate valuation.
The common real estate valuation methods include the cost approach, income approach and sales comparison approach.
- Cost approach. This is the cost of the construction and land, minus depreciation.
- Sales comparison approach. This is the comparison of sales of properties that have similar characteristics.
- Income approach. This is based on the expected cash inflows.
Investment Purpose and Horizon
Given the high-value and low liquidity investment in real estate, a lack of clarity about the purpose can lead to unexpected results, such as financial distress.
Expected Cash Flows and Profit
Cash flow refers to the money that remains after the expenses. When cash flow is positive, this means that there could be a good return on investment for a property.
Develop projections for these profits and expenses:
- Expected increase in the intrinsic value because of price appreciation in the long term.
- Expected cash flow from rental income.
- Benefits of depreciation.
- Cost-benefit analysis of value appreciation vs. mortgaged loans.
- Cost-benefit analysis of renovation so you can get a better price.
New Construction vs. Existing Property
New construction tends to offer attractive pricing, modern amenities and the option to customize. Risks include increased costs, delays, and the uncertainty of a new neighborhood. Existing properties give you faster access, convenience, established improvements and lower costs.
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